Warehouse Operators Fight Unintended Consequences of Tax Bill

Aug. 11, 2006
Tax reform could hit its mark but cause collateral damage to logistics. Logistics service providers bring their case (and yours) to Washington. by Perry

Tax reform could hit its mark but cause collateral damage to logistics. Logistics service providers bring their case (and yours) to Washington.

by Perry A. Trunick

The hallowed halls of Congress can look more like a murky maze, especially when the deal making starts. Undaunted, a group of warehousemen set out in June to tackle Washington, D.C. The members of the International Warehouse Logistics Association (IWLA) had three issues, described in position papers in the red folders each "delegate" received before heading to

Capitol Hill for a day of meetings with as many influential senators and members as they could reach.

Two of the issues the warehousemen and third-party logistics companies wanted to address have direct implications for their customers. In effect, the 40 to 50 company executives visiting Capitol Hill were lobbying for your benefit.

The first, and potentially most contentious, issue is H.R. 1956 and its companion bill in the Senate (S. 2721). That bill would set federal parameters for when it is permissible for a state to tax interstate commerce. It establishes a 21-day test. If you have a business relationship with a warehouseman or 3PL for more than 21 days in a year, the product or goods stored in their warehouse could be subject to state income, franchise or other business taxes if that state chooses to apply them. Even if you have no other presence in the state, this test establishes "presence" for tax purposes.

Some states, like Texas, have aggressive tax policies while others, like Oklahoma, see opportunity in not taxing goods in transit—the term the IWLA likes to apply to such inventory.

When Logistics Today reported on the issue earlier this year, an on-line poll showed 73% of our readers who responded had situations where their only business presence in a state was goods stored at a public warehouse or third-party distribution center.

Subsequent to that, Logistics Today conducted a survey of readers with warehousing responsibility to dig a little deeper into the issue. That survey showed that 64% stored goods in contract facilities for 31 days to 12 months. Over 80% said the public warehouses they use merely store and deliver the goods.

Materials that undergo manufacturing steps are often excluded from certain taxes, so Logistics Today asked what value-add services are performed by 3PLs. Only about 20% of respondents to the survey said a 3PL or public warehouse performs partial assembly or light manufacturing.

Texas Republican Pete Sessions, representative for the 32nd district, addressed the IWLA before members headed off to various appointments with House and Senate staff and elected officials. He said that as important as it is for each of the business owners and executives present to know their members of Congress, it is even more important that your Congressman know you personally.

Sessions, and lunch speaker Representative Ralph Regula (R-Ohio), had each received personal requests to speak to the group of logistics professionals from constituents in their district, reinforcing their message about relationship.

After setting the stage with some positive observations about the economy and the role of logistics, Sessions dived into the deal making that was taking place on the Hill relative to H.R. 1956. The IWLA has made a strong case that outof-state customers who store inventory in members' warehouses or even many consolidation or cross-dock operations would be adversely affected if states used the proposed federal guideline to apply business taxes. Sessions said he had engaged Bob Goodlatte (R-Va.), sponsor of H.R. 1956, on the issue raised by IWLA members, but that Goodlatte doesn't see that there is a problem. Goodlatte is concerned that exclusions like those proposed by IWLA could allow companies to take advantage of the system to avoid paying taxes. Sessions expresses his view that 3PLs are in the supply chain and not the original owner of the goods stored in their warehouses.

"Chairman Goodlatte doesn't have a succinct idea what [the 3PLs] do, how [they] operate, and where the functional separations are," said Sessions. But he is open to avoiding unintended consequences; he just has to be convinced they are there.

To that end, Representative Randy Forbes (R-Va.) agreed to offer an amendment in Goodlatte's Judiciary Committee, and this is where things start to resemble a ballet for its choreography.

Forbes, in offering an amendment, describes the problem and why he believes an amendment should be made. By prior agreement, Goodlatte replies, in essence, that he does not believe that what Forbes is saying is a problem, but that if it were a problem it is an unintended consequence and should be fixed by the law.

Sessions, who sits on the House Rules Committee, noted that if the industry can come up with real examples of how the bill, as written, would adversely affect them, it may be possible to make the necessary changes.

"If you have a real live problem today, we need it because then I can take it and say, here it is," Sessions said. "I can, perhaps, get an order on the Rules Committee, an amendment that maybe we can get on the floor and get it into the bill," he continued.

In the end, Representative Forbes presented his amendment, but it was met less than enthusiastically by committee chairman and H.R. 1956 sponsor Goodlatte, and the language IWLA sought that would clarify and exempt goods in interstate commerce from the Business Activity Taxes was not included.

Switching to the second issue on IWLA's agenda, a problem has developed when importers using their services have requested or required warehouses to comply with the Customs-Trade Partnership Against Terrorism (C-TPAT). Domestic warehouses are precluded from participation by law, so IWLA was seeking federal rules to add warehouses to C-TPAT. As one senate staffer asked, almost shocked, "Let me get this right, are you asking for more regulation?" The answer was "In this case, yes."

On both issues, a best-case scenario may be compromises. For C-TPAT, the result may not be to allow warehouses to apply for C-TPAT certification. As Doug Sibila, IWLA legislative committee member and president of Peoples Services Inc., observes, it may not be an enforceable endorsement, but if U.S. Customs and Border Protection will agree to recognize industry best practices, it will help domestic warehouse operators meet customer requirements to conform to their own C-TPAT status. The alternative is that warehouses would have to meet specific requirements laid down in a customer's C-TPAT compliance guide. One such warehouse operator said he spent $88,000 to meet the requirements of just one customer.

Both issues are still pending, but IWLA initiated contact with other shipper and carrier associations to make them aware of these issues and to open dialogue on these and other issues that affect both suppliers and users of logistics services. "There's no way one association can cover all the bases," Sibila points out.

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